Chapter 9, Problem 9.1LO

To determine

What is economic growth and the importance of economic growth rates.

Explanation of Solution

Economic growth rate refers to the rate at which the output of an economy increases overtime. It is used as an indicator of economic well-being of a nation. Economic growth is used as the most powerful instrument for reducing poverty and improving the standard of living of the residents of a country.

Thus, economic growth rates are important for the following reasons,

a. Helps in reducing poverty - Economic growth imply growth in income in an economy. As income in a country increases it leads to a reduction in poverty in the country. Further, it is ambiguous whether this increase in income will lead to an increase in income inequality or a reduction in it. If rise in income is evenly distributed among different sections then growth will lead to a reduction in inequality and vice versa.

b. Generation of employment - Economic growth generates new job opportunities. The increase in jobs leads to a rise in demand for labor which in turn leads to a rise in wages and salaries of working classes.

c. Improvement in living standards - Economic growth leads to vicious circle of prosperity and opportunity. Economic growth in one period will increase output and income in the other period which will in turn induce firms to expand and increase output further. In addition to this, increased income due to economic growth will induce families to invest in education and improve their skills. This will lead to a further development in availability of skilled labor in future.

Economics Concept Introduction

Introduction:

Economic growth rate refers to the rate at which the output of an economy increases overtime. It is used as an indicator of economic well-being of a nation.